Is RIM Ready to Give Up On Smartphones?

Richard Saintvilus|Contributor

Wednesday, 25 Apr 2012 | 10:48 AM ETThe Street

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RIM Headquarters

A wise man once told me “sometimes one has to first lose an eye to see things clearly.”

It didn’t require a lab experiment for me to appreciate the value in that statement and it has long helped to avert possible aches and pains over the years. In the stock market, embracing the idea of “losing an eye” gets a bit more complicated particularly for corporations given Wall Street’s demands for profits and growth. For that matter, investor success is often heavily predicated on “visibility” or anticipation.

RIM’s Lack of Visibility

This motto is most appropriate for beleaguered tech giant Research in Motion. If there is such a thing as “losing an eye” on the stock market, RIM would rank at the top of the leader board, along with names such as Nokia, Yahoo, AOL, and Novell. For good measure, let’s toss in MySpace, seeing as FaceBook is due to release its highly anticipated initial public offering.

All of these names were once market leaders who allowed lesser-knowns to not only encroach on their terrain, but like a Roman army, eventually conquer the territory, leaving behind what only resembles disaster areas. For RIM, the question is, which of the conquered will it follow? Will it become a Novell or will it become an Apple? Fifteen years ago, Apple would have qualified as having lost an eye due to the dominance of Microsoft.

While RIM’s story is far from over, 75 percent of the book has already been read. The most recent chapter suggests, just maybe, its injury is helping the company to see things a bit more clearly. But is Wall Street buying it? What is becoming clear to me is that RIM’s new management is now at least admitting the errors of its past, absent the regular lifting of its scepter of arrogance.

On the heels of the release of its fiscal fourth-quarter earnings results, it was a pleasant surprise to see the company no longer pretending its house is in order and the market has gotten it all wrong.

But sadly for RIM, this wisdom may be “too little too late” as it reported revenue of $4.2 billion — a number that represents a drop of 19 percent from the previous quarter. Management said the decline was caused by decreased BlackBerry smartphone shipments falling from 14.1 million in the third quarter to 11.1 million in the fourth quarter, as well as a higher proportion of lower average selling prices. RIM also said the Bold 9900 continues to gain traction, while certain models of the BlackBerry 7 were not selling as well as the company had anticipated.

RIM Now Seeing Clearly

The company offered very little to no guidance at all. So this leaves investors to wonder how exactly to value the company, absent some direction of where it is going. But during the conference call, it was somewhat clear to me that the company offered a slight admission that it was quitting the smartphone race. It did this by using the words “entry-level” on numerous occasions. To me, “entry-level” means non-iPhone or Android-based devices — rather, the market for lower end “non-intelligent” phones, in which Nokia is now a leader.

RIM’s management said the following:

“The majority of RIM’s subscriber growth is coming from international markets. With the BlackBerry Curve 8520 and its unique value proposition, we defined the entry-level smartphone segment around the world. We have sold more than 40 million entry-level Curves into this market segment, a huge success for this company.”

“In the fourth quarter, we recognized a pre-tax charge of approximately $267 million relating to those products based on our current expectation for sell-through, estimated inventory levels in the channel and excess inventory on hand. We expect this trend towards the higher mix of entry-level products to continue.”

“The plan to launch more BB7 devices into the entry-level market in the near future, as Thorsten mentioned, and our portfolio of higher ASP products will begin to age before the launch of our new BlackBerry 10 devices later this year.”

What all of this tells me is that the company has conceded the smartphone race to Apple and Google and now sees Nokia as its primary rival. If I am correct, the company deserves a considerable amount of credit for doing something that I think makes perfect sense. What RIM understands is that, for as bad as things have been for Nokia, it has survived by dominating the “entry-level” phone market. RIM now sees this as a more lucrative business and one that can possibly prolong its existence, absent an acquisition, while it also migrates into the services business, supporting its mobile fusion initiative.

The Bottom Line

As possible turnaround stories go, this continues to be one that remains very intriguing. But the more I look at it, the more it seems that the odds are stacked against the company. Now that it seems to want to challenge Nokia, it should not be ignored that Nokia has software giant Microsoft in its corner.

For RIM to be successful, not only does everything have to go right for the company, but its fate also hinges on the slip-ups of its competitors. At least it seems that the company now sees things clearly, but unfortunately, it does not like what it sees.